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Executives

Seth Frank - Vice President of Investor Relations

Glen E. Tullman - Chief Executive Officer, Executive Vice President and Director

William J. Davis - Chief Financial Officer and Principal Accounting Officer

Analysts

Michael Cherny - Deutsche Bank AG, Research Division

Jamie Stockton - Morgan Keegan & Company, Inc., Research Division

Charles Rhyee - Cowen and Company, LLC, Research Division

Atif A Rahim - JP Morgan Chase & Co, Research Division

Jeremy Lopez

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

Stephen B. Shankman - UBS Investment Bank, Research Division

Richard C. Close - Avondale Partners, LLC, Research Division

Allscripts Healthcare Solutions (MDRX) Q4 2011 Earnings Call February 16, 2012 4:30 PM ET

Operator

Good afternoon. My name is Adam, and I will be your conference operator today. At this time, I would like to welcome everyone to the Allscripts Q4 2011 Earnings Conference Call. [Operator Instructions] Thank you. Seth Frank, Vice President, Investor Relations, you may begin your conference.

Seth Frank

Thanks, Adam. Good afternoon, and thanks for joining us, everyone. With me on the call today are Glen Tullman, Allscripts' Chief Executive Officer; Bill Davis, our Chief Financial Officer; and Lee Shapiro, our President. We would like to take as many questions as possible today, so we appreciate it if you limit yourselves to one question and one follow-up.

Before we begin, I'll briefly read the Safe Harbor statement.

This presentation will contain forward-looking statements within the meaning of the federal securities laws. Statements regarding future events and developments, the company's future performance, as well as management's expectations, beliefs, intentions, plans, estimates or projections relating to the future are forward-looking statements within the meaning of these laws.

These forward-looking statements are subject to a number of risks and uncertainties, including factors outlined from time to time in our most recent transition report on Form 10-KT, our earnings announcements and other reports we file with the Securities and Exchange Commission. These are available at www.sec.gov. The company undertakes no obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

With that complete, I'd like to now turn the call over to Allscripts' CEO, Glen Tullman

Glen E. Tullman

Thanks, Seth, and welcome, everyone. I'm excited to share with you what we believe are some very strong financial and operating results for both the fourth quarter and the full year. So let's begin with a quick overview of the financial highlights.

Bookings were a record $327.4 million, up 26% from the fourth quarter of 2010. Non-GAAP revenue in the fourth quarter grew approximately 15% over the prior year, our strongest topline growth quarter of 2011. Non-GAAP earnings per share in the fourth quarter were $0.25, up 22% over the prior year. For the year, Allscripts grew EPS by 23%, a very strong result.

Allscripts also reported record operating cash flow during the fourth quarter of over $100 million. In addition, we continued to repay outstanding balances on our debt while maintaining very solid cash reserves. We're fortunate to enjoy a very significant amount of our annual cash flow, thanks in part to our large client base that provides high recurring revenue, which for the year was approximately 64%.

When you look at our accomplishments, I hope you take away 2 key points. First, we have consistently delivered on our financial commitments. In fact, we exceeded the guidance we provided in 2010 and then updated during the year. Second, we are positioned perfectly in this market, both where it is today and where it's going. Our presence in over 50,000 physician practices not only gives us word-of-mouth in bringing on new practices, but, and this is a really critical point, it is also central to any hospital CEO's strategy of connecting to affiliated physicians. Coupling our client base with a solution set that now covers all points of care, we're the only comprehensive solution available for organizations that truly want to operate across the continuum of care.

Recent developments show that the market is moving in our direction in important ways. Earlier this month, for example, UnitedHealth Group, the nation's largest insurer, announced it will be replacing its current fee-for-service payment model with a value-based plan that compensates hospitals and physicians for reaching quality benchmarks. This is not a pilot program. UnitedHealth is implementing this value-based model across its nationwide network. And they're not done. Forward-looking payers like BlueCross BlueShield of North Carolina, HighMark and Humana, who, by the way, signed a major fourth quarter agreement with us that I'll discuss in a moment, have already made similar moves. And the largest the payer of all, the U.S. Government, is moving in this direction as well. To succeed in this new world of value-based reimbursement, healthcare organizations will require systems that allow them to connect providers across the community, coordinate care and track and report quality outcomes. And that's exactly where Allscripts excels with our sophisticated acute and ambulatory analytics solutions. It is becoming more clear that healthcare continues to move away from the hospital, the most expensive setting, and into lower-cost settings of the physician's office, post-acute care facilities and the patient's home. And Allscripts is the leader in all 3. Many large payers, as well as hospitals, also continue to provide subsidies to physician practices that want to take advantage of federal stimulus dollars for Electronic Health Record adoption. More than 1/2 of physicians in the market have yet to purchase an Electronic Health Record, providing Allscripts with significant opportunities to grow.

While Bill will provide more detail on our quarterly financial performance and on our 2012 outlook in just a few minutes, I want to highlight 3 new client agreements from the fourth quarter that illustrate our success.

One good example is Ridgeview Medical Center in metropolitan Minneapolis. Ridgeview selected our Enterprise Electronic Health Record for their employed physicians and added the Allscripts Community Record to connect and exchange information with independent physician groups across the region. It helped that a number of those ambulatory groups were already using Allscripts.

Ridgeview plans to leverage the superior functionality of our Community solutions to provide their employed and affiliated physicians with a single view of the patient, independent of the setting of care or of the Electronic Health Record being used. Ridgeview illustrates how our strategy is beginning to work in the market, where connectivity, interoperability and physician practice choice trumps closed systems and the idea that a hospital can force independent referring physician practices to use the system the hospital requires.

On the other end of the spectrum, our comprehensive Sunrise solution continues to win head-to-head competition for hospitals and health systems who want an open yet fully integrated clinical system, as well as those who want a single database. During the fourth quarter, NorthCrest Medical Center in Tennessee selected Sunrise. Another fourth quarter Sunrise win was Long Island College Hospital, a 506-bed teaching hospital in New York. Long Island College Hospital is an academic affiliate of SUNY Downstate Medical Center, a longtime Sunrise client. In addition to deploying our Sunrise Acute Care solution, Long Island College Hospital will deploy our Sunrise ambulatory Electronic Health Record for their physicians, storing all of the information in a single database. They join a growing list of Allscripts clients in the New York area that includes North Shore-Long Island Jewish Health System, Memorial Sloan-Kettering Cancer Center, Hospital for Special Surgery, Bronx-Lebanon Hospital Center and Columbia- and New York-Presbyterian Hospital to name just a few of our prestigious clients. Columbia-Presbyterian, by the way, just recently went live on a Meaningful Use version of Sunrise in all 5 of their medical centers, which includes both Cornell and Columbia Universities and over 2,400 beds. And they're subsidizing our MyWay Electronic Health Record, which is designed for small to mid-sized independent practices for all of their community physicians.

As these wins indicate, we continued to expand our Sunrise client relationships in the fourth quarter and in 2011, and we're optimistic about the opportunity for more growth in 2012. Key differentiators contributing to our success include our ability to connect with affiliated physicians, who are important sources of referrals, as well as our open platform.

On the international front, the fourth quarter was significant in that we had success for our full suite of Sunrise solutions as we closed a landmark agreement with SA Health in South Australia. This agreement, finalized in December with the public health arm of the Government of South Australia, will result in the implementation of Sunrise for 80 hospitals with approximately 4,500 total beds across a broad geographic region. In effect, we will become the Connected Community of Health for the state of South Australia with over 1.6 million people served.

Moving to the ambulatory market, Allscripts continues to be the recognized leader in both mind share and market share in Electronic Health Records, practice management and our entire ambulatory portfolio. During 2011, we saw accelerated growth in purchasing of systems for mid-size and small practices. The appeal of our Electronic Health Records was confirmed through the fourth -- throughout the fourth quarter. For example, national primary care provider, Concentra, which has 1,400 providers in 320 urgent care centers and which recently became a Humana company, signed an agreement to implement our Enterprise Electronic Health Record beginning with 400 of their sites. We believe the agreement has the potential for meaningful expansion down the road.

Revenue Cycle Management also continued to provide another significant opportunity for us during the quarter, driven in part by upgrade activity associated with regulatory requirements, by new offerings from Allscripts and by our existing industry-leading portfolio. In the fourth quarter, Mammoth medical center in California selected our new RCM services offering, which gives physicians an end-to-end, integrated financial and administrative hosted solution. We expect that Revenue Cycle will be an area of strong growth in 2012.

So as you can see, we have some very strong momentum to support our growth in 2012 and beyond with a diverse and powerful portfolio of solutions that meet the evolving requirements of every sector of the market.

Now before we take your questions, I'd like to turn the call over to Bill Davis to discuss our financial highlights. Bill?

William J. Davis

Thanks, Glen. And good afternoon, everyone, and thanks again for joining our call today. Before I discuss our results, I would like to suggest that you review the GAAP and non-GAAP financial tables in today's press release and the accompanying explanations to assist you in evaluating and reconciling the financial metrics we will discuss on today's call. The press release and additional information regarding non-GAAP measures are available at investor.allscripts.com.

I want to start out by echoing Glen's remarks. We are very proud of Allscripts' financial performance for the fourth quarter of 2011, and we are equally excited about the market opportunities for Allscripts in 2012 and beyond.

Our total bookings in the fourth quarter were $327.4 million. Again, this is a record for Allscripts, representing 26% year-over-year growth.

Bookings in 2011 grew 17% to $1.051 billion for 2011, indicative of both the strong overall demand environment for healthcare IT solutions and also our competitive differentiation in the market. This figure is consistent with the total growth we expected to see in 2011 bookings as discussed on our last earnings call.

I want to provide some additional information on bookings, starting with the ambulatory. In Q4, we realized a significant sequential increase in physician or ambulatory bookings from enterprise as well as professional EHR solutions. Demand was strong among new clients as well as add-on sales to our existing clients. Ambulatory demand continues to be solid with a shift to increased buying by mid- and smaller-sized physician practices. This cycle is in the early stages, and we expect sustained purchasing activity for first-time EHR buyers in 2012 and beyond.

In addition, the inevitable adoption of ICD-10, despite the delay announced today by HHS, will likely lead to further acceleration of EHR and practice management system adoption as physicians swap out their old systems to manage the transition to a much more complex coding and reimbursement environment. I would emphasize, as we have for some time, that we see this demand curve as a rising tide with the industry enjoying multiple years of continued growth.

Within the hospital market, we saw strong demand across-the-board, including new Sunrise Clinical Manager sales as well as add-on sales into our existing client base. SA Health in Australia contributed to our bookings in the fourth quarter, one of the largest Sunrise transactions ever, and one that marks the beginning of a long-term relationship between SA Health and Allscripts.

From a mix perspective, Software-as-a-Service transactions totaled approximately $82 million or approximately 22% of fourth quarter bookings.

Let's briefly review our backlog. Allscripts ended the fourth quarter with approximately $2.85 billion in total backlog, up approximately $85 million compared with Q3. Approximately 82% of our backlog is derived from multiyear, recurring revenue sources including maintenance, subscription contracts and transaction processing fees. The recurring revenue portion of our backlog has remained consistent with the prior 3 quarters.

Our backlog breakdown is as follows. Software and related Professional Services backlog increased approximately $52 million to $524 million in total. This result reflects new client wins in both our acute and ambulatory client bases.

Subscription and SaaS backlog increased approximately $21 million to $652 million. Our SaaS backlog growth was driven by increases in subscription purchases by both ambulatory as well as acute clients.

Annual and multiyear maintenance revenue backlog increased approximately $40 million to $833 million. Our maintenance backlog growth was driven by a combination of new clients combined with annual maintenance adjustments across our installed base.

Finally, we ended the quarter with approximately $840 million of transaction and other backlog. Our transaction backlog will fluctuate quarter-to-quarter based primarily on the volume of new or expanded hosting and outsourcing agreements along with the timing of related renewals.

Turning to the P&L highlights. We continued to see consecutive quarterly growth in our non-GAAP revenue in 2011, reaching 15% in the fourth quarter when compared to the same quarter a year ago, a very strong performance. Consolidated non-GAAP revenue grew 13% in 2011. Of our total Q4 non-GAAP revenue of $389.2 million, approximately 64% was reoccurring in nature.

Highlighting revenue by line item, our system sales revenue in Q4 grew approximately 14% year-over-year. Importantly, hardware revenue was down year-over-year and quarter-over-quarter, reflecting a shift in the ambulatory market to a higher mix of smaller physician practice installations, which require smaller hardware configuration than the larger enterprise clients.

Also, keep in mind, the shift to SaaS transactions in the smaller segment of the physician market is driving additional revenue to be recognized through our transaction processing and other revenue line versus the system sales revenue line.

Non-GAAP Professional Service revenue increased 42% over the prior year fourth quarter to $71.5 million. Growth was driven by client demand across-the-board, including new system implementations and Meaningful Use upgrades. In particular, the deployment of larger volumes of professional and MyWay systems, in addition to a significant ambulatory upgrade cycle in Q4 led to the year-over-year growth.

We would anticipate a moderation in the Professional Service growth rate as we progress through 2012, reflecting a less intensive period of upgrade activity but with an increasing mix of new installations -- or new system implementations and other related work.

Maintenance revenue grew approximately 6% in the fourth quarter compared to the prior year to $110.1 million for the quarter. Our maintenance growth reflects the continued success in bookings we have seen in 2011 across our base.

It is important to reemphasize the fact that much of our maintenance revenue is subject to only 1% to 3% annual growth. So 6% overall growth reflects a meaningful amount of activation of our new clients.

Finally, non-GAAP transaction processing and other revenue grew approximately 13% in the fourth quarter to $141.6 million, reflecting the addition of new subscription or SaaS clients as well as higher revenue in our outsourcing as well as our remote hosting businesses.

Summarizing the fourth quarter gross margin performance, non-GAAP gross margins were down just slightly, 20 basis points, compared with the third quarter at 45.5%. System sales and professional service gross margins increased substantially but were offset by slightly lower maintenance and transaction processing margins. These latter 2 revenue lines constitute 65% of our non-GAAP revenue in the quarter.

The improvement in system sales and professional service gross margins were anticipated and were discussed at our third quarter earnings call. Specifically, system sales margins of 49.5% increased dramatically from 37.9% in the third quarter, reflecting again a smaller mix of hardware, as well as a smaller portion of third-party system sales.

System gross margins will vary based on mix quarter-to-quarter. But we believe that mid- to high-40% non-GAAP gross margin is indicative of the type of gross margin we can generate over time in our system sales revenue line.

Non-GAAP gross margin in our professional service organization improved to 17.1% from 15.3% in the third quarter as we continued to drive greater productivity in executing our Meaningful Use-related services and realized additional revenue capacity from new professional service team members who were added to the team. Our longer-term view continues to be that we can achieve professional service gross margins in the low- to mid-20% range over the next couple of years.

One final item to note on gross margins relates to transaction processing and other, where non-GAAP gross margin declined to 40.5% from 44.5% in the third quarter. As I mentioned earlier, the mix of outsourcing revenue from quarter-to-quarter will cause this margin number to fluctuate somewhat, and this was the primary driver for the change in the quarter.

Looking at operating expenses. Total non-GAAP operating expenses in 2011 totaled $420.1 million. This represents less than 1% increase over 2010, with a similar percentage change when comparing our fourth quarter performance to a year ago. These results are indicative of the operating leverage in our business even as we continue to invest significantly in new solutions to drive future growth while experiencing a substantial decline in capitalized software compared with the prior year.

Our ability to scale as well as our success with driving merger-related cost synergies helped improve our operating leverage. Consistent with past communications, we anticipate an incremental $10 million in annual cost synergies in 2012 and an additional $5 million in 2013.

Our gross research and development spend totaled approximately $44.6 million in the fourth quarter, an 18% increase year-over-year, representing over 11% of non-GAAP revenue. We continue to invest for growth while -- through a variety of initiatives that Glen already discussed, including product integration, new product rollouts and preparing for ICD-10, among other initiatives.

Capitalized software totaled $13.3 million or approximately 30% of gross R&D expenditures in the quarter. This is down significantly from 37% in the third quarter and 47% in the fourth quarter a year ago. This reduction is consistent with the expectations we had set out previously.

Amortization expense associated with capitalized software, totaled approximately $6.9 million, which was up $1 million over the third quarter and up $4.2 million over the fourth quarter a year ago. The increased amortization over prior periods reflect the impact of substantial capitalized R&D associated with Meaningful Use initiatives during 2010. Note that capitalized software amortization flow through our system sales cost of revenue line, impacting gross margin comparability over the prior periods.

Also note that our net capitalization rate declined to 14% in the quarter from 23% in the third quarter.

Also, we'd like you to know, when evaluating our operating margin versus the fourth quarter of 2010, that we had $4.5 million less of capitalized R&D in the fourth quarter of this year. This factor, combined with the previously mentioned $4.2 million of incremental capitalized software amortization, equates to an $8.7 million expense swing year-over-year, offsetting some of the underlying operating leverage in the business.

Allscripts' non-GAAP net income grew 23% in the fourth quarter and 21% in 2011. Non-GAAP diluted earnings per share totaled $0.25 in the fourth quarter, which equates to 22% growth. Non-GAAP EPS in 2011 equals $0.93 or 23% growth for the full year.

Now turning to our balance sheet. We ended the quarter with approximately $159.5 million in cash and marketable securities, which represents an increase of approximately $73 million from September 30. The significant increase in our cash and marketable securities balance was driven by a truly outstanding quarter on the cash flow and collections front. Allscripts' cash flow from operating activities totaled approximately $107.4 million, the best cash flow quarter in the company's history.

Free cash flow, after capital expenditures and capitalized software, totaled approximately $82 million. Reflecting strong sales and cash collections, accounts receivable was down slightly versus the September 30 balance at approximately $362.8 million, equating to days sales outstanding of approximately 84 days. This represents a 6-day decline from the last quarter. Our DSO this quarter reflects a level more indicative of our expectations for the future, although we will continue to be subject to some level of seasonality adjustments based on timing of billing for some of our annual revenue streams, most notably our maintenance streams.

Outstanding borrowings totaled $367 million at the end of the year, a $10 million reduction over the prior quarter. We repurchased approximately 80,000 shares of our common stock in the fourth quarter at an average price of $17.62 per share. In 2011, we purchased approximately 3 million shares of stock in total for approximately $51 million. As a reminder, in April of 2011, we commenced a stock repurchase program under which we may purchase up to $200 million of common stock over the 3 years. As of December 31, 2011, the total value of common stock available for repurchase under the program is approximately $149 million.

Finally, we ended the quarter with approximately 6,300 employees, which is up approximately 300 versus the end of the third quarter.

Now I'd like to provide our 2012 guidance.

We anticipate 2012 non-GAAP revenue of between $1.62 billion and $1.65 billion. This figure reflects the add-back of acquisition-related deferred revenue of approximately $2.1 million. We anticipate non-GAAP operating income of between $345 million and $355 million, which equates to an adjusted operating income margin of between 21% and 22%. This represents a range of 40 to 140 basis points of improvement over 2011, and remains consistent with our long-term view of driving operating margins to the mid-20 range over the next several years.

Non-GAAP operating income assumes the exclusion of the following noncash charges: approximately $63 million in acquisition-related amortization expense, and $48 million in stock compensation expense, both on a pretax basis. It also excludes the previously mentioned acquisition-related deferred -- I'm sorry, also includes the acquisition-related deferred revenue adjustment mentioned a few moments ago. Further, we will exclude, as we indicated previously, approximately $3 million per quarter of Eclipsys merger-related retention payments through the end of the third quarter of 2012, or approximately $9 million pretax, from our non-GAAP operating results. Please note, Q4 transaction-related expenses were approximately $3.9 million.

We also assume 2012 interest expense of approximately $16.5 million and an effective tax rate in the range of 36.5% to 37%. This equates to non-GAAP net income between $207 million and $215 million or a growth of between 15% to 20% over 2011. Non-GAAP diluted earnings per share are expected to be in the range of between $1.06 and $1.10 based on weighted average diluted shares outstanding of approximately 195 million shares.

Finally, regarding the first quarter, we anticipate, as we have seen in the past, the impact of seasonally slower first quarter. Nonetheless, we still expect bookings to grow in the mid-teens over our first quarter 2011 results.

So in summary, we are excited about our results, their quality and our outlook for 2012. We think this quarter and 2011 illustrates our execution success, and we look forward to delivering more of the same in 2012.

We have a great deal of activity planned with the financial community in the coming 6 weeks, so we look forward to seeing you at HIMSS and at conferences around the country. Thanks, as always, for your interest and attention. And now I'd like to turn the call back over to Glen for a few closing remarks

Glen E. Tullman

Thanks, Bill. To wrap up, I'll just say that I'm very pleased with our fourth quarter and 2011 operating results. We met our commitments to the market, and we continue to add clients who believe in our vision of a Connected Community of Health. I'm confident that we have the right portfolio of solutions, the right people on our growing Allscripts team and the energy to lead the way to the future in healthcare. Thanks to our clients who give us the opportunity to make a difference, to our employees for their continued commitment to delivering on our vision and to our shareholders for your continued confidence in Allscripts. With that, we'll now take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Michael Cherny from Deutsche Bank.

Michael Cherny - Deutsche Bank AG, Research Division

So thinking a bit more, Bill, about the commentary you had on 1Q bookings, and I guess there's a push-in to 2012, and follows up with some of your big-picture comments with regards to how you're attacking the market in the various different areas, as you think about we're past, obviously, the first year of stimulus checks with regards to Meaningful Use, how do you see the continued evolution of your product base in terms of where you're seeing success in the market? How do you see now that you have the integrated product portfolio kind of more in-market, how do you see that evolving, I guess, from a selling perspective going forward, and how -- the different kind of sales strategies you'll take for the various different areas of the market?

William J. Davis

Yes, I'll make 2 comments, and Glen may want to give maybe a little bit more of a strategic perspective on this. Specific to my comment on kind of Q1 bookings, I really just wanted to acknowledge for the market there is some element of seasonality in our sales performance. It's been evident in as many years back as I can certainly remember. So I'm just wanting to call that out for your benefit. And that being said, if you look at our relative performance off of Q1 of a year ago, we do expect improvement off of that. So we do believe that the market continues to be very active in terms of buying decisions. And I would just say that in terms of what it means or how it correlates to our portfolio, as I intimated in several areas of my comments, we're seeing success across our portfolio. So it's not limited to the ambulatory or acute, outsourcing or hosting. The reality is that it is all of the above, and we expect that, that trend will continue. Glen?

Glen E. Tullman

Yes, Bill, I'll just amplify on your comments. One, there's a lot of ways for us to win. We look at Sunrise and we see, as I said, continued growth in our Sunrise sites. People are buying into the open platform. They're buying into the fact that they're not all going to rip and replace and start over and want to use what they have and add our various elements. I mentioned less than 1/2 of the market in the smaller physician groups have actually purchased our Electronic Health Records, so we see great opportunity there. And we've got a great distribution network to help us. And last but not least, we have a lot of strength in the analytics and Care Management areas. And particularly, when you look at something like EPSi, we sell more of that to our competitors' customers than we do to our own because they don't have the capabilities that we have. So that's our surround strategy, and it's one we're excited about. So we see great opportunity.

Michael Cherny - Deutsche Bank AG, Research Division

Great. And then just quickly, thinking about Australia a little bit more. Obviously, again, the SA Health deal done was a key milestone. How do you see your approach expanding to the rest of the country, leveraging the position you have with SA Health as well as some of the other successes you've had throughout your history in Asia? Just thinking about that strategy for the -- that area of the world would be great.

Glen E. Tullman

Yes, we have a very focused strategy, and we want to make sure we execute. So first and foremost with SA Health, we're focused on execution, taking the first step there. We do see some potential expansion opportunity with SA Health, but right now, we're focused on execution. We have been told that there's a lot of eyes on us there and that there's opportunities in the rest of the country if we deliver. So first and foremost, it's about execution. Relative to our broader international strategy, we are focused on a limited number of English-speaking countries where we've had success and also where we see future success. So we'll continue -- we've obviously got a great opportunity and have had great success in Canada. We've done very, very well in Singapore and see more opportunity there. We see the U.K. as an opportunity area for us. So again, a lot of opportunity internationally. But we're going to be careful about what we do internationally as well. So from that perspective, that's what we're focused on.

Operator

Your next question comes from the line of Jamie Stockton from Morgan Keegan.

Jamie Stockton - Morgan Keegan & Company, Inc., Research Division

I guess, Bill, real quick, the sequential decline in the backlog for the transaction, SaaS and other -- actually, not the SaaS, but the transaction line. Was that an Eclipsys hospital that had been outsourcing their IT department to you guys that decided to do something else?

William J. Davis

No. No, it really -- so there's no -- there was no client departure driving that change. As I indicated, it really is just a function of the timing of when those renewals occur. So as we work down that backlog, we will not replenish that backlog until that physical renewal is obtained. So -- but there is -- it's not driven by any specific client departure.

Jamie Stockton - Morgan Keegan & Company, Inc., Research Division

Okay. And then I guess maybe taking a step back and thinking about the hospital market, it seems like some of the deals you guys have signed lately have been a little smaller hospitals, kind of around 100 beds. Is your approach going forward going to be a little more in the let's call it 50- to 150-bed space in trying to get those facilities to really essentially pay out for a robust system as opposed to kind of Eclipsys when it was stand-alone, targeting 150 beds and up? If you could just give us some thoughts around that, that'd be great.

Glen E. Tullman

Yes, this is Glen. I think we're going to be opportunistic. We believe that we can compete very well in the largest academic medical centers and integrated delivery networks. And you heard me list some of our clients. They are the premiere clients in the entire world, folks like Columbia-Presbyterian, in terms of cancer, Memorial Sloan-Kettering and on and on. So some of the largest. That said, we also see an opportunity because of the change with some of our competitors in the mid-sized to smaller hospitals and some of the community hospitals as well. And the nice thing about our system, aside from being open, is that it's flexible. So we can move it up and down the chain and do so very cost effectively. So I think we're going to pick the right size of hospitals. Again, what I called out here was one hospital, 506 beds. Another one was a smaller hospital. And if you look at South Australia, you see some very, very large hospitals, and then you see some really small hospitals in the outback, which we would probably call clinics. So you see a tremendous range there. We're able to operate in all of them. So I think you're going to see a nice mix of our Sunrise wins across-the-board.

Operator

Your next question comes from the line of Charles Rhyee from Cowen and Company.

Charles Rhyee - Cowen and Company, LLC, Research Division

Bill, just want to talk about not only the fourth quarter bookings here, because if I look at the sort of the range you gave the last quarter, it seemed that we came towards the bottom end of that. And if -- and then combined with looking at the first quarter here, so if we think back to last year in the first quarter, you guys highlighted a couple of deals that got pulled forward into the fourth quarter, kind of explaining why the fourth quarter was quite strong and why the first quarter was relatively weak. And then -- so if we kind of maybe normalize for some of that and shift the backlog, say, to the first quarter, you -- a, it looks like you had maybe high teens growth x South Australia in the fourth quarter. Just want to make sure that's sort of how -- the way we think about it. And secondly, one thing about the first quarter guidance then, you're coming off a fairly weak number, and we're talking mid-teens. Glen, you mentioned the strength, that the business is -- the strong position that you guys have across all your markets, and yet you're growing -- you're sort of projecting sort of a mid-teens, which I would say is maybe market, a little bit above market growth at this point. Can you talk to that?

William J. Davis

Yes, it shows -- and there was a lot there in that question, so I'll try to just address a couple of the points that you had asked about. One is, specific to the fourth quarter, again, from our perspective, it was a very strong quarter. It represented 26% year-on-year growth. I've talked to the market about the fact to really drive our topline, we need to see system sales kind of in the high teens, low 20s. So from that vantage point, it was better than what I've intimated before. In the context of the guidance that I provided in the third quarter, I guess I would have characterized it as being very much in keeping with what I told the market we would do there. And again, it was obviously contributed to by the South Australia closure. As for the Q1 comparison, I guess my recollection was in the context of Q1 of 2011, the comment was really pertinent to Q1 of 2010 where there was significant number of acute transactions that had moved from the fourth quarter of '09 into Q1 of 2010 that made a very difficult comparable in the first quarter of this year. As we go into 2012, as I intimated in my guidance, I think that the relative comparability of Q1 of '11 in lining up our expectations for 2012, I think, is a fair comparison. So I just -- I sincerely don't believe an adjustment of any nature in Q1 of '11 would be appropriate. Moreover, I think it's consistent with what I've conveyed on earlier calls.

Charles Rhyee - Cowen and Company, LLC, Research Division

Yes, you're right. I'm sorry, I misrecollected that. That's -- thanks for correcting that. I guess just to follow up then, if we think about the market share -- the market out there today, particularly on the hospital side, and we think about potentially vulnerable vendors out there, why -- when do you think, if you have the ability to attack that share, and -- is that sort of implied within this guidance that you gave for the first quarter? And if not, when do you think we might start to see that?

William J. Davis

Yes, again, I -- what I would say is I would say the guidance for the first quarter is taking into account again the seasonality of Q1, the relative contribution of South Australia in the fourth quarter. That's obviously not going to repeat itself in the first quarter. So as we intimated earlier, we're seeing activity across our portfolio. And so our expectation is, is that our total portfolio is going to contribute to our success in Q1. And I think nothing has changed my views in terms of, a, the market demand and, second, what is necessary in terms of overall growth over a course of a year to drive our topline growth that we've committed to the market. So there's nothing necessarily unique about Q1 that I foresee. It's really just more execution based -- taking into account the seasonality that I've called out.

Operator

Your next question comes from the line of Atif Rahim from JPMorgan.

Atif A Rahim - JP Morgan Chase & Co, Research Division

So Bill, when you look at your bookings growth targets for maybe the first quarter, even the full year, what percentage of that comes from your existing base versus new customers? And when you think about new customers, I would guess most of this is going to be displacement activity with the markets you're in. So how do you look at your share in that displacement activity changing if there were x number of deals, maybe you won a certain percentage of that? Or do you think that number will be in 2012?

William J. Davis

So I -- again, a content-rich question in terms of a lot of pieces. I -- what I would tell you is that we -- our bookings guidance, I -- my view is that in order for us to grow our topline in that kind of low to mid-teens, we need to be seeing bookings growth overall kind of in that high teens to make that math work given our reoccurring revenue base. So I don't foresee that changing in the course of 2012. To your question of mix between -- within our installed base versus net new, that will fluctuate from quarter-to-quarter. But generally speaking, I tend to think about 1/3, maybe as much as 40%, from within our installed base to 60-plus percent coming in terms of net new. To your comment, is it replacement or is it greenfield, I think you really have to delineate between the ambulatory market and that of the acute. We've often said on the acute side it is largely replacement. We're displacing a lot of kind of legacy players that are not doing particularly well in the marketplace. But on the ambulatory side, we still see close to 2/3 of that market being greenfield opportunity. The huge caveat there, and again, I tried to convey that in my prepared remarks, is that there is a shift going towards medium- to smaller-sized practices. So it manifests itself in a little bit smaller deal size just because of the number of physicians or providers involved in those deals. But their -- the conversion to revenue can be a little bit quicker just based on the deployment cycles on those tend to be a little bit shorter. So there are a lot of moving pieces here, but the overarching message we would convey is we see demand for our product portfolio across-the-board.

Atif A Rahim - JP Morgan Chase & Co, Research Division

Okay, got it. And then a follow-up related to the transaction processing gross margin that came in weaker. Can you just go over that again? And how -- I mean, I guess relate to us how that should play out in '12.

William J. Davis

Yes, that's a -- as I indicated, that's where we capture our outsourcing relationships. Outsourcing is typically kind of margin profile, kind of high teens going into the mid-20s. And so the degradation, if you will, in terms of margin profile there, I would point primarily there to a lesser extent in terms of our hosting business that has a very similar type of margin profile. So it's good business, and we're seeing a lot of demand for it, but its margin profile just happens to be a little bit different.

Atif A Rahim - JP Morgan Chase & Co, Research Division

Okay. So the mix was higher this quarter?

William J. Davis

It was a little bit higher, most notably on the outsourcing side, that's correct.

Operator

Your next question comes from the line of Ryan Daniels from William Blair.

Jeremy Lopez

It's Jeremy for Ryan. Glen, I just want to kind of circle back to the comments you made regarding the concentration you have. You outlined a bunch of the accounts you have in the New York metropolitan area. And I'm curious if your concentration there or maybe other places in the country on the ambulatory and/or inpatient side, has that afforded you with opportunities with payers to kind of specifically kind of target Care Management or other opportunities in those communities? I'm curious if you've had any discussions along those lines whether -- what could that look like for Allscripts going forward?

Glen E. Tullman

Well, I think the concentration which we have in a lot of different areas is in fact drawing the attention of payers. It's also allowing us to really focus on this idea of a Connected Community of Health. That concentration -- remember, with 50,000 ambulatory offices, we have a great ambulatory concentration in a number of areas, and payers are looking to us to basically say, "We want to get messaging to those physicians to help them manage care better, to help enforce quality standards, report on quality standards. So we see a lot of that happening. But for sure, if you look at -- I often call out for leadership of BlueCross BlueShield of North Carolina, and that is specifically related to the fact that I believe the statistic is more than 1/2 of the physicians in North Carolina operate using Allscripts' software. So again very -- from that perspective, again that concentration really helps. So we're seeing a lot more interest and a lot more focus from payers. The concentration in New York in particular is leading to conversations with clients and health plans in that area about, again, how we manage populations. And the other thing I'd say is our new set of tools, our leadership in Care Management, the Humedica offering, which is garnering a lot of attention -- I was just at Columbia-Presbyterian 2 days ago with their CEO, Steve Corwin, and we were talking specifically about the recent purchase of Humedica and how they're going to use that to manage populations. If you look at someone like UMass Memorial, they're using a third-party app that was built to sit on top of our open platform called MyCareTeam, and they're managing their diabetic population and starting to see meaningful results. And that's really the future of healthcare, what we're talking about. And then finally, if we go out to a place like Brown & Toland out in San Francisco, they're a pioneer ACO. They're an outsourcing client. They're looking at our portal, community, Humedica, pretty much across-the-board. They bought into the products suite. And what are they doing? They don't own the hospitals. They're specifically managing populations and working closely with payers. So you see that the concentration is working for us, the strategy is working, the focus on ambulatory with the best hospital product out there and then a lot of great surround products.

Jeremy Lopez

Great. And then switching gears a little bit. I know you've had quite a few quarters now under your belt with Misys, and I know the big justification or the big part of the strategy there was the captive practice management base that they had. And I'm curious if you can offer up qualitative or quantitative statistics on our -- thoughts on how the cross-sell has gone into that base, what inning we're in, relatively speaking, in terms of the EHR adoption opportunity there.

Glen E. Tullman

Well, it's interesting. We've seen in our practice management base -- across-the-board, we've seen a lot of stability. Those products work well. We think the opportunity with ICD-10 in part is as those folks start to upgrade, we're going to see upgrades that are both on the practice management as well as the Electronic Health Records side. The other thing you'll find is people don't want to move from what -- the company's they're comfortable with. And that's especially true in payment processing. Our payer path organization process is we're the third largest payment processing organization in healthcare. And specifically, relative to physician processing, I think we process more physician direct payments than anyone. So that's something that people don't want to generally mess around with. So we see ICD-10, a lot of activity there, a lot of movement there. We think the delay was beneficial because it will give people a little bit of breathing room amidst all this change. But frankly, folks are focused on it, moving toward that. And we're continuing to see not a lot of attrition and a lot of positive movement in the former Misys space.

Jeremy Lopez

But in terms of -- I mean, can you give us a feel for where you're at in terms of the cross-sell of EHR, the Allscripts Professional? And I would assume MyWay into that base. Are we in the third inning of that? The fifth inning? I mean, how far along are we in terms of are you -- in terms of executing that strategy?

Glen E. Tullman

I think we're in the third inning. I think we have a lot of upside. We've made good progress, but I think we have a lot of upside in terms of selling Electronic Health Records. And again, what's interesting about this is, is that it's -- there's a lot of product that we have to sell. So we're meeting our plan, we're doing what we expected, but we also see a lot of upside potential as well. So I think we follow the penetration nationally. About 35% is where we are, and I think that's kind of where we're going.

Operator

Your next question comes from the line of Eric Coldwell from Robert W. Baird.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

Can you give us an update on where you are with Sunrise 5.5 upgrades? And also, just on your incumbent ambulatory base, where you are in the upgrade cycle, the stage 1 solutions?

Glen E. Tullman

Well, sure. First of all, in terms of Sunrise, let's start there. I mentioned New York-Presbyterian. We just finished upgrading all of theirs. When you start off with any of these major upgrades, especially at hospitals, they're a little bit rocky. The beauty now is we are knocking these out. If you talk to New York-Presbyterian, they'd tell you that, "We had seamless upgrade," and we're continuing to do that. So we're in great shape. We've upgraded more than 1/2 the base now to 5.5, that positions those organizations for -- not only for Meaningful Use, but it positions them to take on to our new financial products, it positions them to work closely with our community products and it gets everybody on the same software. So we're very pleased with that. If you go to the ambulatory side of the equation, we're again substantially more than halfway in terms of our ambulatory upgrades. And when you consider the sheer number of offices we have and the breadth of our user base, that's a pretty amazing accomplishment. I think from the standpoint of the statistics -- and this is a general figure, but we are doing more every month than we probably did every quarter last year. So it's dramatic capability enhancement. That's going to be important because the future of healthcare is going to be a lot about Meaningful Use 1, 2 and 3, it's about ICD-10, it's about new upgrades to information systems. And our ability to do that quickly, seamlessly across a huge base is going to be a strategic advantage for us.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

And just a quick follow-up. The 195 million diluted share guidance for the year is a fair amount higher than I was expecting given the buybacks and the relative, I'll call it stability in the stock price here recently. Can you give us an update on what's driving that growth in the share base? Are you not modeling aggressive repos during the year? Are there more grants with the hiring? Just any update on what's driving that model.

William J. Davis

Yes, it's -- you just hit the nail on the head. It's really a complement of I've not modeled in incremental share repurchases in 2012, just not knowing with a great degree of specificity how this will come in, and I did not think that was prudent. And then secondarily, we have done a meaningful amount of hiring in 2011. We have built in our plan some meaningful amount of hiring in 2012. So we'll have the full year effect of the hires. There were a couple of notable executive hires in 2011, then we'll get the full year effect next year. But -- so it's really a complement of those 2 factors.

Operator

Your next question comes from the line of Stephen Shankman with UBS.

Stephen B. Shankman - UBS Investment Bank, Research Division

Bill, I wanted to touch on the use of the free cash flow during the quarter. Obviously, it was pretty strong. But again, just $1.5 mil of repurchases and about $10 mil of debt paydown. Any reason for not using kind of the rule of thumb of 2/3 for kind of debt paydown and 1/3 for repurchase? Or perhaps there's a reason for building up the cash balance during the quarter?

William J. Davis

Well, I mean, it's a couple of things. I mean, you have to think about the timing of when that cash came in, in the quarter. It's not linear over the 3 months, number one. But we tend -- we are committed to the 2/3 and 1/3 guidance that we have talked about previously, but we tend to take a much longer time horizon in terms of this application. As I think you know, we were very aggressive earlier in the year, both on the cash -- on the debt reduction as well as the share repurchase. So it's a very frequent conversation that management is having and we're in turn having with our board just in terms of the allocation of capital amongst the cash on reserve versus our debt balance versus aggressiveness on the share repurchase front. So -- but I -- just in all candor, we're taking a much kind of longer-term view to our analysis of that.

Stephen B. Shankman - UBS Investment Bank, Research Division

Okay. And then a quick follow-up there. So that's the way we should think about it in 2012 as well, kind of that 2/3, 1/3 dynamic?

William J. Davis

Yes, I'm not at all troubled? But again, it's not any one specific quarter. But if you look over the course of the year, I think, again, those are good guidelines to be thinking about.

Operator

Your next question comes from the line of Richard Close from Avondale Partners.

Richard C. Close - Avondale Partners, LLC, Research Division

Just real quick. I was wondering if you guys could give us the number of new Sunrise clinicals customers in 2011 and how that compares to 2010.

Glen E. Tullman

I don't know that we're going to get into the measuring business only because you have this issue of, "Are we talking about customers?" "Are we talking about sites?" The reality is that we are substantially up from where we were last year, and that's what we'll look toward next year as well. So we expect a very significant increase, but I don't want to get into that kind of count game because, again, what you really run into, as we've already identified, is it smaller, is it larger, is it one consumer with 2 sites of 3 sites. And we're just not going to get to that individual detail. I think one of the unique things about our business is we can win in a number of ways. So we win when we sell a big acute site, we win when we get their ambulatory business, we win when we get the surround business, we win when we do their payment processing, we win when we do outsourcing. So we look at a lot of different ways to win there and try not to get into the really detailed aspect of any one particular area.

William J. Davis

Yes, Richard, I would, though, try to give you some context. We saw in 2011 both an increase in volume from an SCM deal value perspective and as well as I was very encouraged -- kind of back to the earlier question about size, we saw nice improvement just in terms of overall deal value in those opportunities. So we're being very, to Glen's earlier comment, very selective in terms of where not only can we be successful, but they can yield the right economic benefit for the business as well. So I for one was very pleased with our SCM performance in 2011 and looking for more positive momentum in 2012.

Glen E. Tullman

Just to add one other piece to that. And that is, this was a year that a lot of people said, "Your first year, you've got changes in the sales force, you've got to learn the product," et cetera, et cetera, all the integration issues. And nobody expected a lot. And frankly, I think we delivered a lot. So our folks are chomping at the bit now that they're really fluent in the whole language of Sunrise and SCM and how it all works together and fits in not just products but an integrated solution. So that's really where we are. And then we have time for one more question.

Richard C. Close - Avondale Partners, LLC, Research Division

I'll ask another one. So Glen, you talked about Concentra and then you left it a little bit open, I guess, with the opportunity to expand. Can you go into a little bit more on that relationship in terms of was it just dipping your toe in the water with respect to what happened in the fourth quarter? Or just any additional details?

Glen E. Tullman

Well, again, we talked about 400 licenses. And, well, that's not the full extent of what they can do because we already talked about how much larger they are. It's a significant commitment, and we are working very closely with them not just in the Concentra piece of the relationship, but in the information parts of the business. So from that standpoint, we expect a lot more from that relationship, and we'll begin with a very significant commitment upfront. But their intention and our intention is to continue to expand on that.

Operator

And we have no further questions at this time. And now I would like to turn the call back over to CEO, Glen Tullman.

Glen E. Tullman

Well, again, I just want to thank all of you for joining us today. We think it was a very strong quarter, both from a strategic standpoint, from an operating standpoint and from a financial metrics standpoint. We think that the company is very well positioned as you see healthcare moving to a new model that's focused on not just volume but value that -- where we'll see the entire continuum of care matters. And we are the only provider, the only company that operates across the full continuum of care with products, leading products in the acute area, in the ambulatory area and the post-acute area and then a set of solutions that not only connects those but helps from an analytical standpoint. So we think we're well positioned. We think you're going to continue to see strong results from the company, and we appreciate your support today. So thanks, everyone, for joining us. We'll talk to you soon. See you at HIMSS.

Operator

This concludes today's conference call. You may now disconnect.

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